The coffee franchise is going digital with Square, a company that will eventually allow businesses to circumvent high transaction fees charged by major credit card companies. Imaginechina/Corbis

August 10, 2012

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Would you like a dose of cutting-edge with your latte? Starting this fall, Starbucks is partnering with Square, the mobile payment start-up, to have the new company process all of the coffee purveyor's debit and credit card transactions. The team-up marks a monumental victory for the two-year-old mobile wallet business, and some say the deal could ring the death knell for cold-hard cash — and the old way of paying with cards — as more retailers go digital. Here's what you should know before buying your next Venti:

What is Square?The company, which is headquartered in San Francisco, was started by Twitter co-founder Jack Dorsey in 2010. Square turns any smartphone or tablet into a cash register, using an attachable dongle that swipes, or by having a merchant manually enter a credit card number. (See how it works here.)

Why do businesses like it?Small-business owners are choosing Square more and more because it allows them to bypass expensive credit card and set-up fees. Square's creators say that the company's 2.75 percent fee beats those of traditional credit card companies, which often tack on other hidden charges depending on a number of factors, including a business' sales volume. (Square charges businesses a higher percentage when a customer enters the credit card number manually.)

Does this change anything for consumers?Not really. For consumers paying with a card, not much will change: The cashier will take your credit card and swipe it like they normally would. What is different is that whenever money is exchanged, a digital receipt can either be emailed or texted directly to the purchaser's phone. Merchants can expect their payments to be deposited into their account the same night. Since Square entered the field, competitors like Google, PayPal, and GoPago have all been scrambling to jump ahead with their own mobile systems, but so far, Square is leading the pack.

What's Starbucks' deal with Square?The coffee chain is investing $25 million in Square, Starbucks CEO Howard Schultz will join Square's board, and in the coming months the coffee chain will begin implementing Square's payment system at 7,000 franchises nationwide. Schultz hopes that bringing Square into Starbucks locations "will be a catalyst for Square to get access to tens of thousands of other small businesses and democratize payments." Starbucks also plans to eventually roll out "cutting-edge Square products," says Gerry Shih and Sarah McBride at Reuters, to make customer transactions even more frictionless.

What kind of products?One possibility is to use "proximity sensors" in its stores to detect whenever a customer with Square's app has walked through the door. The customer's name and the photo linked to their Square account will pop up on the register. All the cashier has to do is confirm the person's identity, and the customer's Square account will be charged without them having to whip out their phone or wallet.

Aren't there dangers to doing that?Yes, says Chris Hoofnagle, a lecturer at the University of California, Berkeley Law School. The risks include "somebody stealing your device to the problem of the drive-by download." However, "maybe presenting your name and face could reduce" the risk of "somebody taking your card and copying the information." The biggest challenge at this point will be convincing technology averse customers that the system is safe.

What will happen to the old credit card system?VeriFone, a widely used credit card processing system, saw its shares dive 12 percent when the Starbucks-Square partnership was announced on Wednesday — "the biggest drop since May 25," says Olga Kharif at Bloomberg Businessweek. Recently, VeriFone released its own Square-like mobile system, but it hasn't quite caught on.